Wednesday, June 30, 2010

Wow. I wondered how long it would take, but one of the most respected magazines in the financial world has finally come to agree with my long standing assessment of government debt:

“Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some deus ex machina, such as a technological breakthrough, can boost growth.”

There it is folks, in black and white. The shorter paraphrased version I would suggest is:

“Rising government debt is a Ponzi scheme that requires an ever-growing population to assume the burden—unless some unexpected and unlikely magic happens.”

I will officially retire my tin foil hat because calling government debt a Ponzi is now apparently the accepted norm given how mainstream The Economist magazine is today. If that is the case then it follows easily that our debt fueled economy, including the stock markets and our housing markets are also Ponzi schemes because debt based government spending is propping up all of these.

The article also likens credit to the consumption of alcohol which is a drug. Drug addiction is another economic analogy that I have often used mainly to point out that drug dependent people will have withdrawal pains if they can’t get more of their drug. Deflation is withdrawal pain for the addiction to Keynesian credit gone wild.

Mish adds his own 2 cents which is again something I have written time and again:

“Keynesian fiscal stimulus is nothing but a Ponzi scheme and all Ponzi schemes come to an end.”

Suspend disbelief and take some time to think about what is likely to happen if the Ponzi finally collapses. It might be good to start by reviewing what happened to participants in the Madoff Ponzi. Nobody can predict the future with 100% certainty but historically what happens is that at some point the herd will just wake up and, over a relatively short period of time, everyone will figure out that the whole thing is a con job. They will run for the exits so as not to be the last one out and the last one out will be left holding an empty bag.

Monday, June 21, 2010

There is so much noise and propaganda in the press today that most people are simply overwhelmed and thus they don’t know what to believe. They don’t have the helpful filters of history and Austrian economics to help them squelch the noise. Take the situation where Bernanke and Geithner have been trying to vilify the Chinese people for several years now. Basically, our financial leaders are upset that Chinese rank and file are unwilling to go into deep debt in order to consume American made goods Instead, the Chinese choose to save for a rainy day. Geithner and Bernanke have called this “the paradox of thrift”. They know that without increased debt based spending the global debt Ponzi will collapse. Thus, anyone that doesn’t engage in reckless spending activity is an enemy of the scam. The other attack on China is that they have been keeping their exchange rate too low. While that may be true, the implication has been that if the Chinese let the Yuan appreciate a bit against the dollar, American products will become more affordable for the Chinese people who would then be spending stronger dollars.

By saying these things Geithner and Bernanke prove that the best con men mix a little truth with a lot of BS. They imply that a 20% or even 30% appreciation of the Yuan will have some big positive effect on American jobs and on the global economy. But the Chinese leaders are correctly pushing back on these math-less statements by our leaders because they know 20 or 30% won’t make any difference. Even 200% or 300% won’t do the trick. Chinese factory workers make $300/month. Even if they made 10x more (the equivalent of 3k per month or 36k per year) it would hardly be enough to buy American made goods. So now the Chinese leaders are calling these currency manipulation assertions by US leadership “red herrings”. In other words, our leaders are being accused of trying to distract the people from the truth of the matter.

Friday, June 11, 2010

First off, what is the real crisis in Greece? In short, it’s that their debt Ponzi has gone bust. 3 months ago they used to be able to float 3 month bonds for 3%. Recently investors were demanding nearly 20% because they lost confidence in the con game. Greece can’t pay out that kind of return on short term debt without wiping out all the businesses and workers. That’s why they needed a bail out.

So now the Japanese PM is saying “our finances could collapse if trust in national bonds is lost and growing national debt is left alone”.

For those that haven’t been following things, Japan is in debt to the tune of about 220% of its GDP. This is far worse than Greece and more than 2x as bad as America. Typically when a 3rd world country goes 130+% of GDP into debt then it begins to fall into default. Japan is the world’s 2nd biggest economy and a manufacturing powerhouse so investors are still buying its debt but how long is that going to last given that Japan’s exports are weakening? The article states that “Japan is on firmer financial footing than Greece because most of its debt is held domestically”. I guess that means that Japanese people are so patriotic that they are willing to let their retirements collapse just as they begin to need them? That is lunacy. At some point Japanese people will flee the collapsing debt and Japanese government debt will be rendered nearly worthless just like Greece. The main difference is that Japan is far too big to bail out.

If you read the article you will also note that the author writes about raising taxes into a declining and aging population in order to pay service on the debt. Suuuuuure they will. How can you tax less people and get more revenue? How can you tax people who are going into retirement and get more revenue? It just doesn’t work like that. Government needs to get smaller but the debt it has taken on ensures that it cannot get smaller without defaulting. Japan is no better than Greece and America is only a little better than Japan.

You want to see the dollar skyrocket? If the Yen starts to plummet on fears of Japanese government default then the Yen will behave just like the Euro has: it will plummet as everyone sells it to buy “safer” dollars. If the dollar gets stronger the stock market is going to plummet. All of the pieces are in place for the markets to tumble to new lows IMO.

Thursday, June 10, 2010

At the real risk of being exceedingly redundant I will start off by reminding what Mr. J.P. Morgan said about gold which was that. “Gold is money, and nothing else is”. In the following article, Bernanke admits that gold is not behaving like a commodity. Other commodities, including silver – a metal that is part commodity and part historical money - are not reaching new all time highs while gold continues to poke higher.

The US dollar is strengthening because people are fleeing risk assets of all kinds – real estate, stocks, bonds, etc. They are going to cash to ride out the turbulence. Gold is also rising because people are beginning to remember that it is historically the only real money. As Mish says at the end of his article, even gold could get swept down in a real deflationary crash but such a dip would represent a buying opportunity, not cause to flee. IMO the mechanics of a potential gold price dip are twofold:

1)Gold is a store of wealth. If nobody has any stored wealth then gold has little purpose. If times get really hard then people pull from their savings to get by and that includes selling their gold if gold is where their savings are stored.

2)The gold market is infested with counterfeit gold/promises of gold/paper gold. Many people think they have bought gold by buying the GLD exchange traded fund (ETF) or by buying gold certificates from banks, etc. But in a real crisis all of these promises could evaporate and the people who thought they owned gold could be left holding an empty bag. If this happens then the media will likely paint physical gold with the same risk laden brush as paper gold. Many people would be left with the impression that all gold is risky. This has happened many times before in many different ways. For example, capitalism has been under fire during this crash even though we have not been practicing true capitalism for many years. Instead we have had crony capitalism where the elite get to print money from thin air to invest while the rest of us have to work for it. Also, if we lose, we lose whereas if they lose we still lose. This is not capitalism; this is not a meritocracy. Real capitalism can only occur when nobody has special economic privilege which is to say, when there is no “rubber band” money supply enabled by fractional reserve banking.

Keep an eye on the price of silver. It has historically served as a good canary in the deflation/inflation coal mine. If silver is in a downward trend then the economy is most likely in deflation overall. I like to use triggers and so do many other people. The current market thinking is that as long as silver cannot create new highs (i.e. more than $20.50 spot), there is no way that the deflation is over and that the ensuing massive inflation has begun. If silver begins to break out to new highs then worries about hyperinflation are on the rise and holding dollars becomes a risky position. People have to really internalize the fact that paper money and electronic money have zero intrinsic value. It will only trade for what some greater fool will give you for it. At some point in the life of every fiat currency the people decide it is worth very little or in fact nothing at all. That’s what hyperinflation really is – an awakening by the people to the fact that something they have trusted for so many years is in fact a vaporous lie which can evaporate literally over a matter of weeks under the correct circumstances. Once the confidence in the trust Ponzi is gone, so is the value of shares in the Ponzi.

Tuesday, June 8, 2010

As Mish points out in this article: http://globaleconomicanalysis.blogspot.com/2010/06/arizona-sells-supreme-court-building-in.html, Arizona is in the process of selling off public assets on the cheap in order to keep its debt Ponzi going. It used to just be able to sell bonds that were backed by the good word of the state. In other words, non recourse loans; If the state failed to repay then there would be no recourse for the investors but to eat the losses. State default was considered so unlikely in the past that investors would go along with this. But now investors have figured out that the word of the state isn’t much good anymore so they are now demanding that the loans be backed by collateral, most recently, state buildings such as the supreme court building.

As usual, those at the top of the Ponzi don’t care if they piss away tens or hundreds of millions of other people’s money if it means they can make a few hundred thousand or a few million in the deal. They are selling the whole state down the river in order to keep their high paying jobs for another few months or a handful of years. Absolute power corrupts absolutely. The deals being made are ridiculously bad for the people of the state who will be asked to pay for these missteps long after the short term benefit has completely evaporated. At some point there will be nothing left to collateralize new debt with – all the worthwhile stuff will already have been committed to existing debt. At that point the state will either have to downsize massively, raise taxes dramatically or default on the bonds. Unfortunately for Arizona, it is just a state within a larger country. It cannot easily close its borders to the flight of people and capital as many countries have done in the past when posed with similar financial collapse. The rancher has no control over its livestock, they are free to roam and mingle with the herds of other ranchers. If the state tries to raise taxes too much, people will just relocate to other places that are more tax friendly. The harder the empire squeezes, the more the people will slip between its fingers. Thus the most likely course of action is to default on the bonds sending the collateral into the hands of the investors.

We are entering some entirely unprecedented times in the US. I wonder what will happen in Arizona as investors take control of its justice system. I see it as no accident that first the prison system is bought and then the means to send people to prison (or to keep elite out of prison for that matter) are set up to be acquired once the bonds backing the supreme courthouse default. Once investors own the buildings they will have incredible sway over the activities of the tenants IMO. After all, judges feel more powerful and lordly when they practice their trade from plush settings. Anyone in a position to threaten their working environment wields more than a little influence on the legal system IMO. If this sounds outlandishly tin foil hat/conspiratorial, please consider that profit seeking investors are not doing any of this randomly or without some type of strategy. The quest for profit and power knows no bounds.

If the people of the state were in any way smart they would wait until the bonds default, let the courthouse building fall into the hands of the investors and then set up more modest facilities and demand that legal bureaucrats (judges and their staffs) take up residence in what amounts to a Wal-Mart warehouse building with modest cubes instead of plush offices with granite and marble inlay. Once the people of power are separated from the fancy building, the building becomes nearly worthless to the investors who would then likely sell it back to the state a few years down the road for pennies on the dollar. But judges and people of power would fight that tooth and nail so it will not happen. It is much more likely that they will instead become the willing captives of those who are responsible for maintaining their lavish work environment.

Taking a big step back to look at the longer term picture, where might all of this lead? Every state is having problems but some are much worse off than others. The most likely outcome is that people move from the weaker states into the stronger states as the herd flees the snapping jaws and gouging claws of increased taxation and tyranny. Direct and highly visible competition between states for the best people (the most productive, taxable livestock) may become the order of the day and states within the union could begin to act a lot like bickering sovereigns in the EU (or like the 15 individual Soviet Republics which formed the now defunct USSR). An eventual Soviet style breakdown of the United States is not out of the question and in fact is practically assured if the US dollar collapses as a viable fiat currency. In that case each state or aligned region will want the right to print money from thin air just as the US does at the federal level today. I can already envision Arizona and New Mexico issuing currency with a picture of the Grand Canyon (representing the bottomless pit of big government ; ) on the back. I’m not predicting all of this will certainly happen, but if it came about in the next 1-2 decades I would not be terribly surprised either.

Monday, June 7, 2010

Every day I find more evidence that people are starting to understand and accept that the global economy is indeed a massive, serial credit/trust Ponzi scheme. Today’s exhibit is the embedded chart which came as part of one of my many newsletters. As you can see, the first to be hurt were the marginal players but the circular progression chart below shows how it starts small and then ends with sovereign default, including the USA. The progression is from consumer to corporate to sovereign to the whole concept of fiat currency itself. At some point the fiat currency will not be worth the paper it was printed on. Real stuff in your physical possession is how people will measure wealth at that time. 401ks and pensions and other future promises to pay will be greatly devalued and perhaps even made completely worthless.

The culprit according to this chart is fiat currency structure failure but the truth is that fiat currency is just a support mechanism for the real scam which is fractional reserve lending in which money is conjured from thin air at a rate of 50 or 70:1 relative to the fiat currency. You can blab about the real evils of fiat currency all day (and they are real and evil) but with such massive leverage the real problem is that banks can create money far more money from thin air than the federal reserve can which they lend out to “earn” fees and interest. I wish I could create something from thin air and then rent it out for real money. It would allow me to earn something from nothing – true modern alchemy. That is exactly what our corrupt politicians have allowed banks to do with our dishonest money and credit system.

At some point the world is going to have a massive jubilee of some sort; a massive debt repudiation along with a great rebalancing of wealth and of importance in the global pecking order. Those who get paid nothing for their labor will move up the chain and those who are overpaid will move down the chain. That is not to say that a Chinese laborer will become rich or that a US engineer will become poor but the world is going to have to rethink who gets paid how much for doing what. The rebalancing will have to be global in order to avoid war; everyone will have to agree to the terms. I just hope that those like China who end up getting defaulted on recognize that they too were a key part of the whole sham. If they did not over lend to others so that others could buy their goods then their exposure would be small. But they were greedy too and they could not sell all of their own production in their own country so they lent money to people to buy their goods even though it was clear that the customers could never pay the bill.

Standing back and looking at it all the whole thing seems like a bad joke. The US is broke, in fact far worse than broke. Broke is when you have no money. But we are in debt 13 trillion (as opposed to 7 trillion during Bush II’s 1st term which was not all that long ago), and yet still we loaning others money via the IMF to keep the Ponzi floating. The whole world is one big interconnected system of robbing Peter to pay Paul and then doctoring up the books in order to make it all appear legit. Nobody is really innocent in all of this. For our part, we knew we were racking up debt that we had no intention or capacity to repay yet every year the deficit and the debt expand dramatically.

The more people begin to see all of these explanations and the more they increase their understanding of the fraud the less they are going to believe in the system and the markets and the words of our leaders and the value of our money. I strongly believe that at some point the herd will head south in a big way and only the paranoid will survive financially.